by Rudi Konrath
Since the early 1970s Hungary, with its famous “goulash communism”, has been widely praised by the West and envied in the East. Food has been available in the shops and in the markets for some time. The shortages experienced in Poland and the Soviet Union have been unknown to the Hungarians for years. On a recent visit, crossing the border between Austria and Hungary, one also noticed the marked difference in the political situation of the country.
The rows of barbed wire, which have become such a familiar sight for the past 40 years, have all disappeared. The friendly border guards are checking the passports with an efficiency that would put the passport control officers in Dover to shame. Nothing to suggest that you have just crossed what was called the “iron curtain”.
The Hungarians are taking their historic role very seriously: today, as in the past, they want to be the bridge between East and West. And while the connection to the East has been functioning in one way or another since the establishment of Comecon, Hungary has successfully paved the way in the past few years to attracting Western investment and re-establishing the lost connections.
New legislation has expanded the elbow-room within the economy, although it is important to recognise that much economic activity is still paralysed by the external debt burdens.
The major problem of starting any kind of business used to be business legislation and currency regulations. Today, however, the opportunities created for joint-venture companies are extremely attractive to Western investors, particularly the new possibility of establishing totally foreign-owned private firms. These new laws were introduced at the beginning of 1989 and are already making a difference. The privatisation of major state-owned companies is also under way. Only recently Telfos, the engineering and investment group, has taken a 51% stake in Ganz, the country’s manufacturer of railway locomotives and rolling stock. Other Western companies are also interested in investment through joint ventures.
At the end of 1988 total capital investment was about $300m with some 280 joint-venture companies registered. West Germany accounted for 23 1/2%, Austria 21.1%, the USA 20.2%, Liechtenstein 9.5%, Switzerland 9.3% and Japan 3.5% — the UK did not feature at all.
The first six months of 1989 look somewhat different. The investment by Austria is 31.6%, West Germany 29.9%, the UK has appeared with 17.3%, followed by Sweden with 8.1%, the USSR with 2.5%, the USA 2.2% and Italy 2.1%; all other investors count for less than 1% each.
The following British companies are partners in joint ventures, with their equity shown in percentages:
This list was compiled in January 1989. Since then there are a number of new enterprises, just to mention a few: Price Waterhouse, Telfos Holdings, Coopers & Lybrand (through its Austrian office), Ernst & Whinney.
The features of the recently changed investment legislation are:
(a) The foreign partner is now able to have 100% of equity.
(b) The foreign company can set up a venture with an existing company or set up a completely new business.
(c) A company (foreign or joint venture) is able to buy land for its own use particularly when it is related to manufacturing.
(d) The foreign partner can keep its equity in foreign currency in the bank and can use it for purchases etc.
(e) Any purchase made from the foreign partner’s currency deposits are duty free.
(f) If the foreign partner has less than 50% of the equity no Ministry of Finance application and approval is required, all that is necessary is a simple registration.
(g) Foreign companies and foreign individuals are allowed to buy shares in any companies in Hungary.
There are no empty office buildings, business parks, industrial buildings or residential buildings in Hungary. On the contrary, there is an acute shortage of all types of accommodation. This has been quickly realised by some entrepreneurial Western companies, in particular the Austrians and West Germans.
A handful of speculative office buildings were built in the last couple of years, and due to the new joint-venture legislation others are in the pipeline. The best-known two examples are the so-called International Trade Centres, both of which are in absolutely ideal locations in the heart of Budapest.
The International Trade Centre in the middle of the famous shopping street, Vaci Utca, was built as the first such development with an Austro-Hungarian Interstate Finance Agreement. The total building cost was Sch 134m, with 87% Austrian and 13% Hungarian participation. It is now owned by a similarly named Hungarian company which is responsible for the letting and maintenance. The total gross area is 125,000 sq ft, of which approximately 70,000 sq ft is used for offices and conference facilities.
There are 45 office units, and five conference units which range from about 400 sq ft to 5,000 sq ft. The latter can be hired for between £70 and £180 per day depending on the size of the actual units.
There are also shops, a bank and 72 parking spaces within the building. The current rent is $19 per m2 per month, equivalent to £13 per sq ft pa. The rent is guaranteed for two years.
The other International Trade Centre building just completed was developed by a Hungarian company and is designed by one of the Hungarian state-owned consultancies. It was built by a Yugoslav company, with construction costs of around £65 per sq ft: the rent currently is equivalent to £13 per sq ft pa. The development was financed with a foreign bank loan, and repayment is relatively simple as the rents are accepted only in foreign currency.
It was fully let before completion and the tenants are mainly western companies — Montedison, Sandvik, Farmitalia, Korea Trade Centre, Olivetti, IKEA, Hoechst.
As all presently available spaces are let, there is a long waiting list of companies.
Retail
The retail scene in Hungary is generally led by the department stores and the markets, and, of course, High Street shopping in the traditional way. The distinct difference between inner-city life in London and Budapest is that in the centre of Budapest a mixture of retail, office and residential accommodation exists, a healthy balance that allows life to continue after closing hours. Shopping centres — whether in town, out of town, regional or neighbourhood — simply do not exist.
And the range of goods available in fashion, electronics, furniture and home gadgetry, not to mention areas like gardening or DIY, is extremely limited. According to the statistics, in 1988 Hungarians spent some Sch 4.5bn on excursions to Vienna. If the desired franchise had been available within the Hungarian shops most of this foreign currency could have been kept within the country.
Not all of the available foreign currency, however, was spent outside. A small proportion was spent in the one and only Eastern bloc outpost — Marks & Spencer. Small — and by British standards an extremely modest operation — this franchise store is to be found in Sopron, a small medieval town on the Austro-Hungarian frontier. It operates as a joint venture with Centrum, a department store chain, selling exclusively St Michael brands.
The store is frequently visited by Austrians who come across to do their daily shopping in Hungary, but people from Vienna also come.
The store is situated behind a dreadful 1960s-vintage market hall amid residential blocks. Internally, however, it looks exactly like a Marks & Spencer store would look in the UK.
The store manageress complained that the products available are chosen by London and do not necessarily take into account the local demand. The range is extremely limited.
One can only imagine what would happen if a Marks & Spencer store opened in the centre of Budapest, a city of over 2.5m inhabitants. With only 20% of the currency spent in Vienna during 1988 as income, a western-type shopping centre or department store would have a yearly turnover of more than £50m — no small sum.
Alongside some of the well-known West German chain retailers there is an Adidas shop to be found in the vicinity of the International Trade Centre in Vaci Utca. Since its opening just over a year ago the store can operate only on the basis of closed doors with a queueing system outside on the street, letting in people as others leave. There are never less than 50 to 80 people waiting in the queue to get inside.
Here one can buy with Hungarian currency, although the prices in comparison with Hungarian salaries are very high.
The long queues and the associated spending should give the impression to Western retailers of a sizeable section of the Hungarian society with spending power.
Future investments
Foreign companies currently are looking for approximately 220,000 sq ft, according to INVESTCENTER’s information.
There is a new office building, the East-West Business Centre, with construction already started, located on the ring road near the centre of town.
This is approximately 220,000 sq ft, and is being financed and built by a joint-venture company. One of the partners is Skanska (Sweden) with a 54% share, with a registered capital at 25% of the total investment cost of approximately DM 80m (£27m). The construction will be implemented mainly from credit.
The centre is planned to be completed in 1991 and it will be operated by Skanska. Letting agents are Jones Lang Wootton of Frankfurt, tenancy is available for two or five years, and the approximate rent is £14 per sq ft pa. The building is equipped with air-conditioning, window sill ducts for IT throughout, sprinklers, smoke-detection, closed-circuit TV surveillance, key card lock system etc.
With wall-climber lifts on the exterior facade, granite-faced thermal and sound-insulated curtain walling, natural stone-clad reception area/entrance hall, glazed atrium with restaurant and shopping mall on ground-floor level, this building will offer a truly western ambience at reasonable rents.
It is reckoned that in the next few years there will be requirements for at least another 500,000 sq ft of office accommodation, and a much larger amount of residential space. All sources indicate that investment for this kind of development, sometimes incorporating shopping and retail, is welcomed and encouraged by most city councils.
City councils are also capable of participating in joint ventures, providing land and the infrastructure as part of the equity, with the foreign company providing the rest of the finance, and possibly the actual construction works. All the existing office and hotel developments in the town are being constructed in this way.
Another area of investment is tourism and leisure.
One of the hotel developments going up in the centre is financed by Austrian investment, the planning and the construction are both carried out by an Austrian construction company, and even the supervision is undertaken by an Austrian architect.
There are more than 9,500 historic monuments in Hungary, including some 650 palaces which are under national protection. In view of certain international trends related to tourist resort developments, these castles are now the focus of investment opportunities in Hungary. Some are in areas where a refurbishment into hotels and the like would be welcomed. With the new regulations regarding foreign investment it is guaranteed that the firm brought about with foreign participation may freely transfer that part of the profit in foreign currency in which the original investment was made. The same rule applies if the foreign party sells the property completely or in part, and wishes to transfer the value derived from the property. It must be understood that this property is “free from restriction”, ie freehold.
There are also very generous tax provisions made for firms which carry out activities like reconstruction of protected palaces or houses.
In the first five years of existence after funding, the firm would not pay any tax at all, and from the sixth year onwards the firm will enjoy a 60% tax relief with no VAT charge on any investments.
Joint ventures are also seen by the Hungarian government as the best way to finance projects, in particular those related to the general infrastructure, which is seen as an important key to the Hungarian economy.
An example is the proposed construction of the fourth Metro line, which is planned from the city centre to the southern part of the town. A French consortium has been discussing the finance in return for the concession to operate the system after completion.
Conclusion
The World Exhibition EXPO in 1995 is to be shared between Vienna and Budapest, if the international committee agrees later this year. This would trigger quite a number of activities which require Western investment, management and know-how.
Italian, West German and American/Canadian supermarket and retail chains are planning massive investment in shopping centres. Many of these business proposals do, however, depend on the EXPO being held in Budapest.
But the signs are that investment, one way or another, will come, enabling the Hungarians to achieve their economic goal — to catch up with neighbouring Austria by the year 2000.
Rudi Konrath DipArch AKNW RIBA is director of design at Grove Consultants, of London.
